Loaded with seed fund, Kalaari plans a ‘convertible’ ride

The firm has so far focused primarily on series-A funding rounds of $3-4 million.BENGALURU: Venture capital investors may have turned cagey about signing big cheques, but those flush with cash like Kalaari Capital aren’t holding off scouting for and netting early the next big ideas. Kalaari, an early investor in online retailers Snapdeal and Myntra, plans to invest about $20 million (Rs 135 crore) in 40 startups over the next two years as a part of its seed and incubation programme — new territory for the investor used to larger deal sizes.

The VC firm, which raised $290-million last year, is a little late to the party, having stayed away from the early-investment stage even as peers Accel Partners and SAIF Partners rolled out seed investment programmes in 2014 and 2015.“We didn’t do a single seed deal in the last 10 years, but we feel that there is a requirement and a gap in the market in terms of mentoring,” Vani Kola, managing director at Kalaari Capital, said in a recent interview with ET. The firm has so far focused primarily on series-A funding rounds of $3-4 million.

The RBI, announcing its monetary policy on Tuesday, said it would ease regulations to allow startups to raise foreign venture capital using innovative tools like convertible notes to bolster entrepreneurship in India.

The instrument functions as a debt that will automatically convert into preferred stock on the closing of series-A fundraising, avoiding stock dilution when a startup is still validating its idea. Convertibles are typically used by accelerators, angel investors or seed-stage funds like India Quotient, but are rarely employed by large, Indian VC firms. Kalaari has also roped in former Cisco chief technology officer Padmasree Warrior and Airbnb’s global expansion head Varsha Rao to mentor startups that it will invest in under its seed investment programme, KStart. In the works are tie-ups with global technology majors and a large plugand-play workspace next to its office in Bengaluru’s Whitefield.

KStart will have a new batch every quarter of up to five startups. Experts say that even as venture capital activity at the seed funding level has picked up, the number of startups likely to be able to secure follow-on funding will remain low, posing higher investment risk.

“The number of series-A deals in the market among Indian VCs are only 40-50 transactions every year, so a majority of seed deals will not get follow-on rounds,” said Sharad Sharma, angel investor and cofounder of software products thinktank iSPIRT. Last year, the number of seed and angel investments surged 82.5% to 650 deals, from 356 deals in 2014, according to VCC Edge, underlining the increasing number of idea-stage companies getting capital.

To minimise the risk, Kalaari said it will have an option to invest up to 50% in new funding rounds being raised by its portfolio companies.